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The maximum bid-ask spread

Author

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  • Blau, Benjamin M.
  • Griffith, Todd G.
  • Whitby, Ryan J.

Abstract

We examine the return premium associated with a new measure of illiquidity that focuses on extreme points in the distribution of bid-ask spreads. Results show that stocks with larger maximum bid-ask spreads and price impacts command a return premium that is both statistically and economically significant. These results are robust to a series of multifactor portfolio tests and cross-sectional regressions controlling for mean spreads and other observable liquidity metrics. These findings suggest that the distribution of spreads matters when identifying illiquidity return premia due to the multi-faceted nature of liquidity.

Suggested Citation

  • Blau, Benjamin M. & Griffith, Todd G. & Whitby, Ryan J., 2018. "The maximum bid-ask spread," Journal of Financial Markets, Elsevier, vol. 41(C), pages 1-16.
    • Handle: RePEc:eee:finmar:v:41:y:2018:i:c:p:1-16
    DOI: 10.1016/j.finmar.2018.09.003
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    More about this item

    Keywords

    Illiquidity premium; Bid-ask spreads; Liquidity risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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